Evaluation of credit risk based on firm performance

This paper investigates whether productive inefficiency measured as the distance from the industry’s ‘best practice’ frontier is an important ex-ante predictor of business failure. We use samples of French textiles, wood and paper products, computers and R&D companies to obtain efficiency estima...

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Bibliographic Details
Published in:European journal of operational research 2010-03, Vol.201 (3), p.873-881
Main Authors: Psillaki, Maria, Tsolas, Ioannis E., Margaritis, Dimitris
Format: Article
Language:English
Subjects:
Applied sciences
Bankruptcy prediction
Best practice
Credit risk
Data envelopment analysis
Data envelopment analysis (DEA)
Directional distance functions
Efficiency
Estimates
Exact sciences and technology
Firm modelling
G21
G21 Credit risk Data envelopment analysis (DEA) Directional distance functions Bankruptcy prediction
Mathematics
Nonparametric inference
Operational research and scientific management
Operational research. Management science
Operations research
Portfolio theory
Probability and statistics
Regression analysis
Sciences and techniques of general use
Statistics
Studies
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Summary:This paper investigates whether productive inefficiency measured as the distance from the industry’s ‘best practice’ frontier is an important ex-ante predictor of business failure. We use samples of French textiles, wood and paper products, computers and R&D companies to obtain efficiency estimates for individual firms in each industry. These efficiency measures are derived from a directional technology distance function constructed empirically using non-parametric data envelopment analysis (DEA) methods. Estimating binary and ordered logit regression models we find that productive efficiency has significant explanatory power in predicting the likelihood of default over and above the effect of standard financial indicators.
ISSN:0377-2217
1872-6860
DOI:10.1016/j.ejor.2009.03.032